An AXA to grind

You might think Christophe Roupie already has enough on his plate. He runs the trading operation for one of the biggest asset managers in the world, with a 55-strong team in London, Paris and Connecticut and he has plans for a presence in Hong Kong. But he is also keen to spend more time in Brussels. As he tells Automated Trader Editor Adam Cox, the buy side can do a lot more to work with regulators and ensure more sensible rules are put in place.

Adam: What would you say is the overall philosophy in terms of
your trading strategies?

Christophe: We're here to execute our fund
managers' and clients' investment decisions by going to the
financial markets and trading their orders. Therefore, and I know
it sounds very simple and very basic, our main objective is to
minimise market impact whilst providing best-in-class execution
in a sound and risk-controlled operational framework. Our trading
strategy is driven by our multi-expert asset management model,
meaning that market intelligence and brokers' interests are
concentrated within trading before being directed to the relevant
investment teams on a global scale.

We have also developed tools and invested massively in systems
which allow us to stream real-time information to our fund
managers and clients across all asset types. We always try to be
the most efficient conduit for liquidity and market information
to our clients.

We trade in all currencies and markets - equities, ETFs,
sovereign, credit, emerging and high-yield bonds, convertible
bonds, FX, money-market and treasury instruments as well as
listed and OTC derivatives (CDS, IRS, ILS). I am also in charge
of securities financing, which encompasses repo and securities
lending, giving me a fairly wide spectrum of product coverage.

Christophe Roupie, AXA

Adam: When you say your clients, you mean the fund managers.

Christophe: Globally yes, our clients being the
fund managers. But we also consider clients all the stakeholders
within AXA IM or outside the company who are supporting our
activities and ensuring we meet our objectives.

Adam: Maybe we can talk about the tools and systems you
mentioned.

Christophe: Minerva, our order management
system, is at the core of our execution process. In terms of risk
and control, we want to ensure that when looking at an order from
creation to execution and matching we have as much STP as
possible. To keep it fairly high level, Minerva is linked to the
decision-making tools of our fund managers and clients, meaning
that all the orders that we receive follow a very strict process
whereby they are initiated by the fund manager, pushed through a
constraint server and then sent electronically to the traders.
The traders will then choose the way they interact with the
marketplace, either via voice or using FIX technology to release
orders to brokers or directly to e-trading platforms.

For example 80% of the orders received in FX were traded
electronically in 2012, and that equates to roughly one-third of
our volumes. It represents a 15% increase in the number of
tickets and a 42% uptake in volumes from the previous year.
Overall, we traded over 1.5 trillion euros across all assets in
2012.

Adam: Okay, so the scale of your trading must be a big factor.
Not many firms are initiating these kinds of flows. If you're
aiming to reduce market impact, how do you go about it?

Christophe: The numbers I've given you so far
are for FX, which is a very competitive market. A lot of the
tickets can be processed via electronic platforms and the market
impact is therefore negligible. What we trade electronically
usually has limited market impact. Anything above a certain size
would be traded via voice, or any currency which is less of a
natural fit for e-trading. We still take the view that for
important transactions - regardless of the asset type - slippage
can be better managed when conducted by voice. Again here, this
is the job of the traders to make that choice and understand
where they can go to trade at the best price or obtain the best
possible result for our client, and also keeping in mind that the
overarching philosophy from a risk perspective is that all of our
business is driven by counterparty risk and counterparty limits
we must comply with.

Risk control is at the heart of our investment process and also
at the heart of our execution process. I'll give a very good
example: we don't do DMA. We don't think that we can actually
fully control the risk which is embedded in having direct access
to exchanges. The traders are our first level of control and they
also rely on brokers to perform a second level of control or
oversight. And I have to say that I feel more comfortable having
that 'safe pair of eyes' approach rather than running the risk of
an execution going wrong because of a fat finger which could have
a massive market impact and of course damage our investment
performance.

"We probably have hundreds of strategies at our disposal today...
But the traders tend to stick to a few with which they feel
extremely comfortable with. The names do give it away though,
like Iceberg, Dagger, Sniper or Stealth!"

If we look at fixed income globally, which is a large part of our
AUM and consequently represents a large share of our trading
volumes, in 2012 we traded half of our tickets electronically for
roughly the same split on volumes - that's a shift we've seen
every single year since 2005, a gradual pickup in the volumes
traded on platforms.

And on equities, our use of algorithmic strategies has steadily
increased to reach 25% of our volumes today from 5% a few years
back. We use a combination of low and high touch trading to
manage market impact, including program trades and crossing
networks. The rest is still executed by voice and as a matter of
fact we very much encourage our traders to keep a high degree of
interaction with their sales coverage. From an STP/FIX standpoint
close to 100% of our orders are confirmed and allocated
electronically.

Adam: Why the focus on the electronic communication if ultimately
trading is voice-based?

Christophe: When we talk about controlling the
operational risk around the activities, what is key is that as
soon as the orders are traded by our brokers, we send the
allocation electronically, meaning that the broker is actually
able to see and to confirm the operation which has been traded,
the size, price and details of the financial asset they're
willing to buy and sell, and that information which is sent to
brokers will also come back electronically in our front office
systems, including those of fund managers.

Adam: So it just makes everything neater and easier to manage.

Christophe: Exactly. The process is quite
complex because one or more custodians are also in the loop. But
we want to have as much STP as technically possible, meaning that
once you actually execute the trade even if you negotiate by
voice, you want to release the economic terms of the transaction
electronically to your broker, in order for the broker to confirm
that the trade has been acknowledged, recognised and allocated,
on a fund-by-fund basis before hitting the custodian. That
information will be reconciled and filter back into our fund
managers' system so they're actually able to see that the order
has been duly executed and their holdings duly updated. For us it
is critical to have as neat a process as possible and the level
of confidence and comfort we get when the information is actually
conveyed electronically and not via voice is very high.

Adam: You mentioned that algo trading on the equities side jumped
from 5% to 25%.

Christophe: That's what we've experienced in AXA
IM over the last two or three years.

Adam: That's obviously a big move. What's behind that?

Christophe: Minerva had been successfully
implemented in all trading locations and across most asset
classes including equities. We decided then to look at the
benefits of using an execution management system - EMS - for
equities. The reasoning behind using an EMS was to give us better
visibility, better control and oversight of our executions via
enhanced applications, and also to outsource some operational
duties like broker network maintenance and API integration.

Our provider TradingScreen is a gateway to access numerous
algorithmic strategies, as the core of its business is to offer a
global network of brokers and their tools to its client base. I
would say that's the main reason behind the increased use of
algorithmic trading for my teams. It's the fact that we provided
them with more tools via an EMS. It was a big change in the way
we manage our order flow.

We probably have hundreds of strategies at our disposal today
given that brokers are either rebranding similar techniques as
part of their marketing exercise or building new ones, or even
offering to design our own strategies. But the traders tend to
stick to a few with which they feel extremely comfortable with.
The names do give it away though, like Iceberg, Dagger, Sniper or
Stealth!

At the end of the day we try to interact with dark pools in the
best possible fashion to minimise market impact.

Adam: And the overriding goal is execution, not alpha generation?

Christophe: Once the order has been created and
hits our systems it is "good to trade", and we must execute at
the best possible price taking into account various best
execution criteria including, for example, the likelihood of
execution or likelihood of settlement. The fund manager is
accountable to his client for fund performance and outperforming
its benchmark; we of course must execute at a price or spread
which is closest to the price or spread used by the fund manager
when simulating the investment strategy. We want to preserve
alpha and if we can help generate alpha we'd be more than happy
to contribute to the performance of the funds. To this end we do
use algorithms but we also use pre and post-trade analytics, for
example transaction cost analysis, as I think most of our peers
actually do, to benchmark our execution. For equities we use two
benchmarks: one is interval VWAP, the other is a
liquidity-adjusted implementation shortfall benchmark. For fixed
income we have developed an in-house TCA tool which is also
adjusted for market liquidity. Our FX offering is still being
fine-tuned. But overall the results are positive and
outperforming our benchmarks.

We have very active interaction with our fund managers via
regular meetings and calls. We send trade ideas from our brokers
and also make our own recommendations. We are not advising them
on their strategies, but we highlight what we feel are good ideas
and I guess that's something which is very difficult to translate
into a process. But in terms of governance, we do discuss every
month the trading flows and the activity with our key
stakeholders and we'll be going through the numbers and analysing
various KPIs agreed with them.

Adam: So if you felt it was a good time to get more aggressive or
more cautious, you would be poring over the data and discussing
it directly with the fund managers and stakeholders?

Christophe: The ultimate decision to buy or sell
is left with the fund manager. Once the order is coming through
the order management system, we have full discretion in the way
we execute that order. But of course it might differ between
traders and fund managers; it's a very sensitive discussion
sometimes, depending on the seniority of the fund manager and the
seniority of the trader. But overall the discussions are always
very positive and constructive.

I will illustrate this approach with our fixed income traders and
the sovereign crisis in Europe. As one of the largest asset
managers in the world, it is conceivable that this crisis
impacted our funds and created some flows. This information was
extremely sensitive and the potential for market impact was real.
The traders knew where liquidity could be found or how brokers
were positioned, and it was shared with the fund managers.

We had to drive and manage our execution in such a way that there
was no leakage of information to the Street in order to minimise
or absorb market impact. And that philosophy and approach applies
across all asset types, even more so when markets are stressed.

Christophe Roupie, AXA

Adam: So your goal is to get those traders the best tools so that
they can perform, and then over time watch that and manage that.

Christophe: Exactly. Meaning that we did and
still invest a fair amount of money in systems and once in place
you have to have the appropriate reporting of those flows. I
would say it's taken us a good two years to build an appropriate
reporting tool across all asset types and that means we can
easily report activity internally and externally or conduct
analysis on the activity. For example, the information I have
given you on FX, fixed income and equities is directly extracted
from our front office reporting system. I think what is key to
any business is transparency. Once you have a process in place
you can control the flows in and out of this process and report
on those flows or make strategic decisions based on them. I
believe that's actually a key component to the regulatory
discussions in Brussels - the importance of trade repositories
whereby all information is centralised and can, for example, be
used by regulators if need be.

Adam: You've been stressing that under your watch there's been
this increase in electronification and there's a big focus on
STP. How far along do you feel you are in process? You were
quoted in 2010 as saying that STP wasn't quite possible for all
the markets you traded in. Are you where you want to be, or how
much more work is to be done on that?

Christophe: Back in 2005 when I joined AXA IM I
was able to demonstrate the positive impact of STP and more
importantly the benefits it gave us in terms of best execution
and trading capacity - i.e. headcount. I think we're probably in
the stage where we're fine-tuning our model. We are very
comfortable with the fact that our existing execution process,
including bespoke and in-house developments, can be duplicated in
any location including very fragmented markets like Asia, where
you still need to invest to stay competitive.

The next stage for us is to maximise what our EMS can offer us in
terms of analytics and trading strategies across more asset
classes. We need to explore and understand how far we can go down
the route of STP. I think that 100% will never be reached, due to
the fact that some brokers are not set up from an STP
perspective, but what that represents in trade volumes is
negligible. Again, STP has to be looked at across the life cycle
of a transaction, from order creation to order execution, trade
settlement and trade matching including fails management.

Adam: Can you talk about how much you have invested?

Christophe: The cost of supporting such a
business from an IT perspective and the cost of investing into
new systems and processes on a global scale over the last eight
years runs well into millions. Not only have we reduced our
operational risk, but we also impacted positively our execution
performance, so I feel it was - and still is - well worth the
investment.

Adam: You've been, one could say, constructively critical of the
level of dialogue with regulators. At the same time, with the
investment you've made in technology, you would seem to be well
placed for adapting to some of the directives in terms of
providing full reporting. I'm wondering if new regulation is
affecting you less than other firms.

Christophe: As much as I can be critical
sometimes of the lack of discussion and exchanges with Brussels,
I have also been fairly critical of the fact that the buy side
has been pretty absent from Brussels. To this end, and in order
to be more proactive with European commissioners and politicians,
we will try to secure more time with them in order to better
explain what we do, and how their decisions can affect our
businesses. As for local regulators, I've always had a very
constructive dialogue with them, especially since MiFID kicked
in, or with the Cassiopeia initiative on fixed income.

Regulation is supposed to provide a level playing field to
protect the end investor. And that's far from being the case. I
think some decisions which are taken in Brussels today might
affect less the big powerhouses like AXA IM because of the
investments we've already made in our infrastructures, and also
due to the commercial weight we have on our brokers. For a
smaller size institution, that's a different story. The
investment needed to cover some regulatory obligations will
clearly affect them, hence our duty to be more proactive where it
matters for all.

I also recognise that the learning curve for many people in
Brussels, especially policy makers, has been very steep, with
technical discussions on HFT, pre-and post-trade transparency,
large-in-scale waivers and so on.

To come back to your point on how regulation affects us, I feel
that we are pretty well organised at AXA IM to face up to our
regulatory obligations. Being a multi-expert asset manager the
depth of expertise of all functions, including support function,
is staggering. EMIR for example has drawn - and is drawing - on
our internal resources and expertise on a daily basis while we
still have to invest massively in other projects. The fact that
the EMIR deadline has been pushed back by Brussels is a testimony
to how complex this piece of legislation actually is.

Calibration and simplification will be key because the story will
not be the same depending on the type of assets and the potential
impact of each transaction in the market. We cannot apply the
same thresholds to different assets. Fixed income today
represents a very large part of any European-based asset
manager's AUM and MiFID 2 is trying to encompass assets which
were not looked at in the first instance. So all in all, it still
is massive work to be done in a very short time frame.

So yes, realistically, we would like to spend more time in
Brussels, and I think it would be good to try to explain better,
or in simpler words, what we do on a day-to-day basis and how
some regulation would actually affect our business.

Adam: Could you sum up what you'd most like to see on pre- and
post-trade in terms of focus, and are the regulators listening?

Christophe: Some of the proposals are nothing
but good sense. Of course, those decisions are not serving the
interests of all market participants - it's impossible to come up
with a rule that will be accepted by all. But I do feel that with
the right calibration we should be able, for example on the
pre-trade aspect, to get the right level of transparency and
market-making obligations. And on the post-trade I think it is
exactly the same situation. We are an institutional investor, we
invest for the long-term and fully understand when the trade
should be disclosed or not. We understand when the size of a
transaction might impact the marketplace and hurt the interest of
the liquidity provider who might have taken a proprietary risk. I
am afraid it will be challenging to come up with a
one-size-fits-all model.

We know the markets are still not as efficient as we would like
them to be. The Libor scandal has painfully reminded us how some
people are still using market information to maybe front-run or
manipulate data and prices against the benefit of our investors.
So I think that we need to try and have a more constructive
dialogue.

And to answer the second part of your question, are they
listening? To be honest, yes they are, but they are also hearing
many different viewpoints and some lobbying has clearly taken its
toll. Today, I am not quite sure which door I need to knock on in
order to be listened to. At the same time I refuse to categorise
brokers as the bad guys even though some have been pushing their
own agendas without their clients' interests at heart.

Of course it would be ideal to get permanent representation in
Brussels. The top 50 European buy sides institutions could easily
fund an office in situ where policy makers or anyone
interested in what we have to say would come and hear from the
buy side practitioners how we manage our businesses. That would
actually allow us to keep momentum, which I feel is missing
today.

So we need to be a lot more engaged. Do we have time to do this?
Well, we'll have to make time. I don't want regulation to be - I
love this expression in English - death by a thousand cuts. We
should try to simplify some of the discussions and also be able
to have some testing periods, whereby you implement the policies,
but if you feel that there's a gap or if it's not actually
addressing the right issues then we should be able to review and
analyse the impact and go back to the drawing board directly with
the policy makers.

This, of course, is wishful thinking as policy makers are doing
just that, making policies across a multitude of products and
affecting millions of people - the financial markets being one of
the most focused areas of late - and quite often for the right
reasons. But it is not all so negative, and the challenge is to
show the benefits of efficient markets to a wider audience.

Adam: So there's a lot of box ticking.

Christophe: That's the way I see it. They are
ticking boxes in an orderly fashion as the scope they are
covering is so wide, and of course they are reacting sometimes to
the people in the street, to politicians, to the press, to some
lobbying being quite indiscriminate when it comes to showing us
as the bad guys. We must continue to show we do not use financial
markets as a huge betting platform; rather we are acting with the
best interest of our investors at heart.

Adam: One semi-serious question: have you ever thought that
you're in the wrong job and that maybe you should be working from
the regulatory side?

Christophe: To be honest with you I love what I
do, I really enjoy my job at AXA IM, and I am happy to take up
challenges. Quite funnily, one regulator has actually asked me
following a panel discussion last year whether I would consider
maybe jumping over. So I said, 'No, not for the moment.' I'm 47,
so maybe when I am a lot wiser and a lot older … and when
my mortgage is fully paid up.